Fid.-Philadelphia Trust Co. v. Comm'r of Internal Revenue

• Decision Date: 27 December 1954
• Docket Number: Docket No. 43719.
• Citation: 23 T.C. 527
• Parties: FIDELITY-PHILADELPHIA TRUST COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

23 T.C. 527

FIDELITY-PHILADELPHIA TRUST COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 43719.

Tax Court of the United States.

Filed December 27, 1954.

Alfred J. McDowell, Esq., and John Anthony Day, Esq., for the petitioner.

George H. Bowers, Jr., Esq., for the respondent.

The taxpayer was organized as a national bank in Pennsylvania in 1934. It took over certain assets and assumed certain liabilities of a financially embarrassed bank bearing a similar name. In 1948 the taxpayer transferred from its deposit liability account to its Undivided Profits or Surplus Account an amount representing unclaimed, dormant deposits, after it had made fruitless attempts to locate the depositors. Held, the amount so transferred represented taxable income to the taxpayer in 1948.

OPINION.

RAUM, Judge:

The Commissioner determined a deficiency of.$3,593.74 in income tax for the year 1948. The question for decision is whether $6,780.64 in unclaimed and dormant deposits in the taxpayer bank represented income when in 1948 it transferred that amount from its deposit liability account to surplus. The facts have been stipulated, and the stipulation is incorporated herein by reference as our findings.

The taxpayer, National Bank of Olney at Philadelphia,¹ was incorporated as a national bank in 1934, when it acquired various assets and assumed certain liabilities of a liquidated national bank bearing a similar name, The National Bank of Olney in Philadelphia, which we shall refer to as the predecessor bank. Among such liabilities were certain depositors' accounts of the predecessor bank.

During 1948 the taxpayer, after fruitless attempts to locate certain depositors by mail, advertising, and otherwise, transferred to its Undivided Profits or Surplus Account certain of the above depositors' accounts which were unclaimed, dormant, and inactive in the amount of $6,780.64, and thereupon closed out its unclaimed deposit accounts in that amount. It did not include that amount as income in its 1948 return, but it is stipulated that it was shown as ‘a Sundry Credit to Earned Surplus.’ The Commissioner treated this amount as additional income in his determination of deficiency.

During the taxable year 1948 and the years prior thereto taxpayer's books, records, and papers were not examined by any officer or agent of the Commonwealth of Pennsylvania, nor did the taxpayer at any time during that same period ever report to the Commonwealth the names and last known addresses of the depositors, or persons entitled to the unclaimed moneys or dividends together with the amounts and nature thereof.

First. We consider at the outset the general question whether unclaimed deposits may constitute income to a bank. The problem does not come to us without persuasive precedent. Boston Consol. Gas Co. v. Commissioner, 128 F.2d 473 (C.A. 1), affirming 44 B.T.A. 793, involved unclaimed deposits which had been made by former gas company customers as well as unclaimed refunds due to certain customers. It was held that these items represented income to the company when they were transferred to surplus on its books. The Court of Appeals said (128 F.2d at p. 475):

It seems to us, therefore, looking at the question from a practical point of view as we are admonished to do (citing cases), that the petitioner in setting up books on December 31, 1935, must have taken the practical view and elected at the time to treat as income both unclaimed deposits and unclaimed overpayments by users of quarter meters.

The decision in the Boston Consol. Gas Co. case itself found support in a variety of earlier cases. Thus, in Chicago, Rock Island & Pacific Railway Co., 13 B.T.A. 988, affirmed on this issue, 47 F.2d 990 (C.A. 7), certiorari denied, 284 ‘u.s. 618, it was held that overcharges received from railroad passengers, as a result of errors in making change, where the passengers could not be identified or located, constituted taxable income. Again, in Charleston & W.C. Ry. Co. v. Burnet, 50 F2d 342 (C.A., D.C. Cir.), affirming 17 B.T.A. 569, an employer which in 1924 had credited to profit and loss unclaimed wages earned by employees prior to 1922 was held to have realized taxable income in 1924, notwithstanding that it held itself ready to make payment to employees, presenting proper claims. The Court of Appeals noted that (50 F.2d at p. 343) ‘the effect of the bookkeeping was to make available for general uses the particular moneys impressed in 1921 with the particular obligations * * *.’ See also Atlantic Coast Line Railroad Co., 23 B.T.A. 888; Nehi Beverage Co., 16 T.C. 1114 (amount transferred from deposit liability account to miscellaneous income account with respect to deposits received from customers on containers used in the taxpayer's business); Wichita Coca Cola Bottling Co. v. United States, 152 F.2d 6 (C.A. 5), certiorari denied, 327 U.S. 806 (transfer to surplus of account with respect to deposits on cases and bottles); Fort Pitt Brewing Co., 20 T.C. 1, affirmed, 210 F.2d 6 (C.A. 3), certiorari denied, 347 U.S. 989 (portion of reserve for returnable containers treated as income even in absence of bookkeeping entry transferring item to surplus or any similar account).

Petitioner argues that book entries do not determine income. It is indeed true that book entries are not conclusive; on the one hand, they cannot convert into income that which is not in fact income, nor, on the other hand, can their absence prevent the treatment of a particular item as income which is in fact income. Cf. Helvering v. Midland Ins. Co., 300 U.S. 216, 223; Doyle v. Mitchell Brothers Co., 247 U.S. 179; Northwestern States Portland Cement Co. v. Huston, 126 F.2d 196, 199 (C.A. 8); Commissioner v. North Jersey T. Ins. Co., 79 F.2d 492, 493 (C.A. 3). But the book entries in the instant case are not without significance. They mark the point of time when it is reasonable to conclude as a practical matter, on the basis of the present record, that the unclaimed deposits will not in fact be paid over the depositors,² and they represent an assertion of dominion over such deposits by the bank, which has undertaken to deal with them as its own funds. In some of the cases cited above, involving unclaimed deposits or similar situations, the making of book entries was undoubtedly an element that was considered in reaching the results therein. See Boston Consol. Gas Co. v. Commissioner, supra; Charleston & W.C. Ry. Co. v. Burnet, supra; Atlantic Coast Line Railroad, supra. In Wichita Coca Cola Bottling Co. v. United States, 152 F.2d 6 (C.A. 5), certiorari denied, 327 U.S. 806, dealing with an account representing deposits for cases and bottles the Court of Appeals stated (p. 8):

If the balance was an aggregate of old deposits, the book entry closing them out and putting the money to free surplus funds was not mere bookkeeping, but a financial act, as though a bank could and did transfer to its surplus old deposit accounts as barred or abandoned. Such a financial act creates income in the year in which it is done. Compare Maryland Casualty Co. V. United States, 251 U.S. 342, 352, 40 S.Ct. 155, 64 L.Ed. 297; Boston Consol. Gas Co. v. Commissioner, 1 Cir., 128 F.2d 473; Commissioner v. Dallas Title & Guar. Co., 5 Cir., 119 F.2d 211.

And in the comparable situation presented in Fort Pitt Brewing Co., supra, a like result was reached even in the absence of book entries transferring the item in question to surplus or another similar account.

Petitioner argues that under Pennsylvania law the statute of limitations does not begin to run against depositors until there has been a demand for payment followed by a refusal, that the bank was accordingly still liable in full to the depositors in 1948, and that there is therefore no basis for including the unclaimed accounts in the taxpayer's income for 1948. But the conclusion that it presses upon us does not follow. The important consideration is that it was unlikely as a matter of fact that the bank would have to honor its obligation to the depositors in question. To be sure, if in later years a depositor should make claim and be paid, a corresponding deduction would then be available to the bank. Meanwhile, however, it must be treated as having realized income with respect to the accounts over which it has thus asserted its control. This very situation was considered in several of the cases noted above. In the Boston Consol. Gas Co. case, the Court of Appeals agreed with the conclusion that ‘deposits returned and overpayments refunded under such circumstances may be deducted from income in the year in which such return or refund is made * * *.’ 128 F.2d at p. 475. Similarly, in Charleston & W.C. Ry. Co. v. Burnet, 50 F.2d at p. 343, the court in dealing with unclaimed wages that were included in the employer's gross income stated: ‘Of course, if any part of those wages due should be claimed and paid at any subsequent time, deduction to that extent could thereafter properly be made.’

The possibility that the taxpayer might have to make a payment to a depositor in a later year may give it a right to a deduction in such year. But it does not prevent the inclusion of the unclaimed deposits in gross income in the earlier year, when such future payment appears improbable.

Second. Petitioner argues that the unclaimed deposits cannot be treated as income to the bank by reason of the escheat laws of Pennsylvania. It relies upon the Act of June 7, 1915, P.L. 878, as amended, 27 Purdon's Pennsylvania Statutes, sec. 282, and the Act of May 16, 1919, P.L. 177, as amended, 27 Purdon's Pennsylvania Statues, sec. 431. Its position is that under either of the cited provisions unclaimed deposits in the hands of national banks are subject to the Pennsylvania escheat laws and that therefore the bank can have no such claim of right to the deposits as would justify their inclusion in gross income. We do not agree with petitioner...